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Since 2003, the nonresident seller may opt for simplified VAT registration and return filing. This option, if taken, allows the seller to register for VAT in the Member State of its choice. The chosen Member State acts as a VAT clearing house for the seller’s VAT obligations across the EU. The seller makes self assesses its quarterly VAT liability due each Member State in which it has sales. The seller makes a quarterly payment to the Member State of registration in that state’s currency (the euro or its national currency if not the euro). This simplified filing option will be available also to resident EU sellers under certain conditions beginning in 2015. In exchange for this compliance simplicity, among other things, sellers will have to disclose in their quarterly returns sales revenue and corresponding VAT liabilities across Europe. Each Member State to which VAT is due receives this financial information automatically each quarter.

Registration by a nonresident seller for its VAT compliance obligations per se does not create a corporate tax nexus for that seller in the country of registration. However, the corporate nexus rules for digital businesses are one of the subjects of an ongoing study by the OECD to generate proposals for taxing the digital economy in response to the new challenges what an international digital supply can create under conventional income tax rules. The OECD will publish the results of its study and any proposals for the reform of international tax standards for the digital sector in September 2014.

7. Sellers will have to gather, consolidate and keep specific consumer data on file for 10 years from the date of the transaction.

Beginning in 2015, all sellers of digital services into the EU market will have to gather details regarding the location of its consumers in order to determine the proper VAT rate and amount to collect on transactions with each consumer in Europe. The EU legislation includes detailed guidance on what information the seller can use to make this determination. The seller must be prepared to demonstrate that it has a revenue accounting system which properly sources its revenue from consumer transactions and has properly self assessed its VAT liability with respect to that revenue. It will be costly and complex for small and medium sized enterprises to meet the letter of the law regarding the capture and retention of evidence of its customers’ location. From a privacy law perspective, the drafters concluded that this data collection and retention requirement does not violate current and proposed European privacy legislation.

8. Ireland may emerge as the VAT registration jurisdiction of choice for nonresident sellers to set up European residence given the US e-commerce “cluster” and currency advantages.

Some European countries such as Ireland recognize the opportunity and potential synergies in promoting the VAT single registration option to nonresident sellers of digital goods and services. Ireland already can boast having one of the largest, if not the largest, cluster of US digital group operations in Europe and has depth of experience in attracting US Fortune 500 companies to invest there. The Irish authorities are likely to prioritize the smooth functioning of the 2015 version of the nonresident simplified registration process for those sellers choosing Ireland as their country of registration. As the European business of those nonresident sellers VAT registered in Ireland expand or mature, Ireland will be high on their list of European jurisdictions for direct investment when those nonresident sellers decide to go tax resident and establish a more permanent presence in Europe. Ireland has at least one more advantage for VAT registration over another US friendly European jurisdiction such as the UK. A nonresident seller registered in Ireland can make a single quarterly payment in Euro for its VAT liabilities across Europe, most of which are likely to be Euro denominated. A nonresident seller registered in the UK will have to make the single quarterly payment in British Sterling.

9. The large internet portals may be a “third” option for compliance by contracting away its VAT taxable status.

Another likely trend caused by the EU VAT rules for nonresident sellers is for US developers of apps and content owners to, for a fee, transfer commercial rights to the internet portal based in Europe through which the digital apps and content is sold in order to avoid seller status for VAT purposes. The internet portal becomes for VAT purposes the EU seller of the apps and content of thousands if not millions of providers. The VAT compliance burden then falls on the internet portal, which probably enjoys the advantage of a sophisticated consumer billing system and the cost benefits of scale for recordkeeping and revenue sourcing. The simplified registration option could have the effect of making nonresident sellers relinquish their seller status in the EU consumer market for convenience. This transfer in ownership rights to the internet portal can have European privacy law implications as well. Relinquishing this VAT status will not make doing business in Europe any less complex, however.

10. Act now, timely and proper VAT compliance is essential, before and after the January 1, 2015 change in rules.

US businesses will need to get used to the global trend of more taxes, more financial reporting, and more regulations on digital commerce. The globalization of regulation is a direct consequence of the globalization of consumer markets which digital supply chains have created. Timely compliance with these regulations will continue to be key but present a significant challenge for small and medium sized enterprises given the complexity of the rules. These rules in large part are untested due to the constantly evolving digital business models they are trying to chase. US sellers will also have to comply soon with new and amended European privacy legislation which are worthy of a separate action list. The VAT obligations described here are already in place, however.

The EU VAT system for taxing the sale of digital goods and services is being celebrated by tax policy institutions like the OECD as a template for a global VAT system of taxation on digital commerce, and is already in the process of being embraced by the OECD and other VAT jurisdictions. There are lessons to be learned from the EU VAT system as well as state internet sales tax rules in the US evolve and policymakers consider a US national VAT system like the one which has been in place in the EU for decades.

VAT enforcement efforts focus on the seller, not the consumer. One of the potential weak links of the nonresident VAT rules described is the lack of an enforcement mechanism, formal or informal, for EU countries to obtain the assistance of third countries like the US to help in collecting VAT due by companies based in the US and selling into the EU market. As the OECD quote at the outset of this list suggests, European tax authorities have relied primarily on the good faith of nonresident sellers to sign up for one of the two compliance options available to such sellers since 2003.

Digital businesses in the US and around the world are well advised to act now to eliminate unnecessary VAT exposures for selling into the EU consumer market. Among other actions, they should review and understand in detail the expanded VAT compliance obligations now and the changes in 2015, review digital supply chain contracts to identify and manage latent VAT liabilities, upgrade accounting systems to source properly country by country B2C revenue to determine the VAT base across Europe, and to cure any noncompliance with the VAT rules for past periods. There is no one size fits all solution to resolving liabilities for past noncompliance. A noncompliant, nonresident digital business will have to approach every Member State in which it has consumers and settle for prior periods in which VAT was owed but not paid on digital sales in that state. As is always the case with noncompliance, it is better to get to the competent tax authorities to disclose and seek forgiveness before they get to you.